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Approaches for Scaling Back the Defense Department’s Budget Plans

In 2013, the Department of Defense (DoD) faces an 11 percent reduction (after adjusting for inflation) in its base budget from the amount it received in 2012. (The base budget funds the department’s normal activities but excludes overseas military operations like those in Afghanistan.) Under current law, the department’s budgets will increase by a cumulative total of 2 percent more than inflation between 2013 and 2021, still well below its funding in 2012 in real (inflation-adjusted) terms. Those limits are mandated by the Budget Control Act of 2011 (BCA), which capped annual funding for defense and nondefense agencies during that period.

The reduction in 2013, however, follows a period of generally increasing real resources for DoD; from 2001 to 2010, funding for the department’s base budget rose by more than 40 percent, after adjusting for inflation. In real terms, after the reduction in 2013, DoD’s base budget is about what it was in 2007 and is still 7 percent above the average funding since 1980.

The Congressional Budget Office (CBO) analyzed the cost of implementing DoD’s plans (as presented in its 2013 budget request and related planning documents) and examined general approaches that the department might take to comply with the budget caps. CBO found that:

The cost of implementing DoD’s plans through 2021 would exceed the funding allowed under the budget caps by a large margin;

DoD will have to cut back on its forces and activities more each year to remain within the budget caps; and

Policymakers could reduce costs by cutting the number of military units, funding to equip and operate the units, or both.

CBO examined four broad options for modifying DoD’s plans to align projected costs with the available funding.

The Costs of DoD’s Plans Would Be Much Higher Than the Funding Permitted Under the Budget Caps

The BCA initially created a set of caps that limited funding for discretionary programs and activities for each year over the 2012–2021 period. That act also established procedures that led to automatic spending reductions, which lowered those initial caps for the years 2014 to 2021 and cut funding for 2013 through a process known as sequestration. The reduction in 2013 limits DoD’s base budget to $478 billion in that year, in CBO’s estimation. Thereafter, the caps will allow DoD’s funding to increase by an average of about 2 percent per year through 2021, reaching $563 billion in nominal (current-dollar) terms. In inflation-adjusted terms, however, DoD’s base budget is allowed to grow very little, rising to only $489 billion in 2013 dollars by 2021, which represents cumulative growth of 2 percent over that period, or an average annual growth rate of 0.3 percent.

How will those limitations affect DoD’s ability to execute its plans as described in its 2013 Future Years Defense Program (FYDP)? To estimate the reductions that DoD will have to make to comply with the BCA, CBO developed two projections of the cost of implementing the department’s plans through 2021. One, the FYDP-based cost projection, is based on cost assumptions incorporated in DoD’s 2013 FYDP, which was released in March 2012 and spans the years 2013 through 2017, and CBO’s extrapolation of those figures from 2018 through 2021. The other, called CBO’s cost projection, is based on the agency’s estimates of cost factors and growth rates that reflect DoD’s actual experience and Congressional policy decisions in recent years.

DoD’s plans call for base budgets averaging $529 billion a year through 2017 (in 2013 dollars). Those estimates are within 1 percent of the initial funding caps set by the BCA when it was originally enacted. But under the tighter limits resulting from the automatic spending reductions, funding for DoD’s base budgets cannot exceed an average of $476 billion annually through 2017 (in 2013 dollars), about 10 percent less than the department projected in its plans. Thus, by its own estimates, DoD will have to significantly cut back on its plans to comply with the funding limits.

Moreover, the department’s estimates reflect the assumption that it will be able to slow the growth in costs it has experienced in recent years for military health care, military and civilian compensation, peacetime operations, and the acquisition of weapon systems. In contrast, on the basis of DoD’s historical experience, CBO anticipates that implementing the department’s plans would cost an average of $550 billion a year from 2013 through 2017, or $21 billion per year more than DoD’s estimate. If CBO’s estimate is correct, funding for DoD over that period will be about 13 percent less than the cost of implementing the department’s plans.

DoD Will Have to Cut Back on Its Forces and Activities More Each Year to Remain Within the Budget Caps

Because the inflation-adjusted costs of DoD’s plan will rise over time much more rapidly than the budget caps will, the reductions that DoD will have to make relative to its 2013 plan to comply with the caps will be larger in later years (see figure below). From 2018 through 2021, the caps will be about 12 percent below an extrapolation of DoD’s five-year plan and 19 percent below CBO’s projection of the cost of that plan.

Relative to the forces and activities it can sustain in 2013 (which already reflect funding that is 9 percent less than the budget request for that year), DoD will have to cut back a little more (or find additional efficiencies) every year through 2021 to remain within the caps, primarily because the costs of providing compensation and acquiring weapon systems will grow faster than the rate of increase in the caps.

To Reduce Costs, Policymakers Could Reduce the Number of Military Units or Funding to Equip and Operate Those Units or Both

To lower DoD’s costs, policymakers could reduce the number of military units it fields, reduce funding for acquiring equipment and for operations, or adopt some combination of those two approaches, with the following broad implications:

Reducing the number of military units fielded would allocate reductions across most of DoD’s budget. Units that remained in the force would continue to be funded at levels that have produced today’s highly capable forces. However, having fewer such forces might jeopardize the military’s capacity to respond to multiple conflicts simultaneously or to prolonged conflicts without requiring long overseas deployments for service members.

Reducing the funding for equipping and operating military units would maintain the size of the force at planned levels, but the lower funding might result in fewer or delayed purchases of new weapons, decreased peacetime operations, less training, and a greater focus on operating efficiently. Such measures might affect the U.S. military’s superiority in areas such as advanced weaponry and comprehensive training, and might constrain peacetime operations.

CBO examined four broad options that policymakers could adopt that would bring DoD’s budget into compliance with the BCA—each involving different combinations of force reductions and cuts to acquisition and operations. The options are illustrative; other combinations tailored to specific strategies would be possible (and, indeed, might be preferred). CBO assumed that, in reducing the number of combat units, DoD would trim the same proportion from support units and overhead; if DoD could not make proportional reductions, more combat units would need to be eliminated to achieve the required reductions. In all four options, the cuts would be larger in 2021 than in 2013 because the costs of implementing DoD’s plans would increase faster than the funding allowed under the BCA.

The effect of such reductions on national security is beyond the scope of this paper. Although these options would represent a significant scaling back of DoD’s plans, U.S. military forces have substantial technological and operational advantages over those of other nations today. Therefore, policymakers may find it acceptable for the United States to reduce the size of its military as a decade of overseas conflicts draws to a close. Notwithstanding the direct costs of those conflicts that were largely funded from emergency and supplemental appropriations, DoD’s base budget in 2012 was substantially larger in real terms than in 2001. Even at their deepest in 2014, the cuts from the BCA will return DoD’s budget to where it stood in real terms in 2006, still 25 percent above the department’s funding in 2000.

Option 1: Preserve Force Structure; Cut Acquisition and Operations

Under this option, policymakers would preserve the size of U.S. military forces but reduce funding for acquisition and operations. Implementing this option would result in 13 percent cuts in funding for acquisition and operations in 2013. Funding for military compensation would remain as projected. Because the cost of DoD’s plan would increase in subsequent years, the required reductions would be greater in 2021: They would reach 31 percent relative to CBO’s cost projection and 20 percent relative to the FYDP-based cost projection.

Under Option 2, policymakers would achieve half of the reduction after 2017 by cutting forces and half by reducing funding for acquisition and operations for the remaining forces (see figure below). CBO assumed that the force reductions would be phased in over five years, similar to the force cuts already planned in the FYDP. The reductions in forces would lower military compensation and operations costs by a combined 11 percent and acquisition costs by 8 percent in 2021 relative to CBO’s cost projection. If cuts were spread evenly across DoD’s four military services and among both full-time (active) units and part-time (reserve) units, those reductions might include, for example, the following: 7 Army brigade combat teams, or BCTs (out of a planned force of 66); 28 major warships (out of a planned force of about 244); 2 Marine regiments (out of a planned force of 11); and 11 Air Force fighter squadrons (out of a planned force of about 93) by 2021. (Today, the Army has 73 BCTs, the Navy 214 major warships, the Marines 11 regiments, and the Air Force about 90 fighter squadrons.) Reductions in similar proportions would be made to the other types of units in each service. Cuts would be about one-third smaller under the FYDP-based cost projection.

DoD would be able to keep more units in total (but fewer active units) than indicated in this option if it shifted active units to the reserves. Alternatively, DoD might be able keep more active units by making use of an approach called tiered readiness, whereby some units—those not expected to be deployed immediately in the event of a conflict—would be allowed to fall to lower readiness standards in order to reduce costs.

Until the force reductions were phased in, acquisition and operations funding for all forces would bear the brunt of the cuts. By 2021, funding for acquisition and operations for the military units that would remain in the force would be reduced by 15 percent relative to DoD’s plans under CBO’s cost projection and by about 10 percent under the FYDP-based cost projection.

Option 3: Achieve Savings Primarily by Cutting Force Structure

Under this option, policymakers would adhere to the BCA limits primarily by cutting force structure below its planned levels. Until the force reductions were fully phased in, additional cuts to acquisition and operations would be made to stay within the BCA limits from 2013 through 2016. The cuts in force structure would yield a combined 23 percent reduction in military compensation and operations costs and a 15 percent reduction in spending for acquisition in 2021 relative to CBO’s cost projection. Applied proportionally, the reductions could include 16 Army BCTs, 51 major warships, 3 Marine regiments, and 22 Air Force fighter squadrons, roughly twice the size of the reductions under Option 2. Cuts would be smaller—about 15 percent for military compensation and operations and 10 percent for acquisition in 2021—under the FYDP-based cost projection.

Option 4: Reduce Force Structure Under a Modified Set of Budget Caps

Under this option, the BCA would be modified so that the automatic spending reductions could be phased in more slowly; however, the same total reduction to DoD’s funding (in 2013 dollars) would be achieved with larger reductions in later years than under Option 3. Policymakers would adhere to those modified budget caps entirely by cutting force structure. Spread evenly, the cuts could include 18 Army BCTs, 58 major warships, 3 Marine regiments, and 25 Air Force fighter squadrons. U.S. forces would be about 4 percent smaller than those under Option 3. Under CBO’s cost projection, funding for military compensation and operations would be reduced by about 25 percent and acquisition by about 17 percent in 2021. Cuts would be smaller—about 18 percent for military compensation and operations and 11 percent for acquisition by 2021—under the FYDP-based cost projection.